Preface: Steering the country through compacts and consensus
The economy continues to expand
In April, we commenced a new financial year. In May, we learnt that the Indian economy is estimated to have grown 8.2% in real terms in FY24. In June, a new government took office. The National Democratic Alliance government led by Prime Minister Narendra Modi has returned to power with a historic mandate for a third term. His unprecedented third popular mandate signals political and policy continuity.
The Indian economy is on a strong wicket and stable footing, demonstrating resilience in the face of geopolitical challenges. The Indian economy has consolidated its post-Covid recovery with policymakers – fiscal and monetary – ensuring economic and financial stability. Nonetheless, change is the only constant for a country with high growth aspirations. For the recovery to be sustained, there has to be heavy lifting on the domestic front because the environment has become extraordinarily difficult to reach agreements on key global issues such as trade, investment and climate.
High economic growth in FY24 came on the heels of growth rates of 9.7% and 7.0%, respectively, in the previous two financial years. The headline inflation rate is largely under control, although the inflation rate of some specific food items is elevated. The trade deficit was lower in FY24 than in FY23, and the current account deficit for the year is around 0.7% of GDP. In fact, the current account registered a surplus in the last quarter of the financial year. Foreign exchange reserves are ample. Public investment has sustained capital formation in the last several years even as the private sector shed its balance sheet blues and began investing in FY22. Now, it has to receive the baton from the public sector and sustain the investment momentum in the economy. The signs are encouraging.
National income data show that non-financial private-sector capital formation, measured in current prices, expanded vigorously in FY22 and FY23 after a decline in FY21. However, investment in machinery and equipment declined for two consecutive years, FY20 and FY21, before rebounding strongly. Early corporate sector data for FY24 suggest that capital formation in the private sector continued to expand but at a slower rate.
Sustaining overseas investor interest will require effort
Foreign Direct Investment, the subject of much analysis, has held up. RBI data on India’s Balance of Payments shows us that the investment interest of external investors, measured in terms of dollar inflows of new capital, was USD45.8 billion in FY24 compared to USD47.6 billion in FY23. This slight decline is in line with global trends. Reinvestment of earnings remained the same. Repatriation of investment was USD29.3 billion in FY23 and USD44.5 billion in FY24. Many private equity investors took advantage of buoyant equity markets in India and exited profitably. It is a sign of a healthy market environment that offers profitable exits to investors, which will bring newer investments in the years to come. That said, the environment for foreign direct investment to grow in the coming years is not highly favourable for many reasons.
Interest rates in developed countries are much higher than they were during and before Covid years. This not only means a higher cost of funding but also a higher opportunity cost to invest abroad. Second, emerging economies have to compete with active industrial policies in developed economies involving considerable subsidies that encourage domestic investment.
Third, notwithstanding the impressive strides made in the last decade, uncertainties and interpretations related to transfer pricing, taxes, import duties and non-tax policies remain to be addressed. Lastly, geopolitical uncertainties, which are on the rise, will likely exert a bigger influence on capital flows, notwithstanding other reasons for preferring to invest in India.
Shocks and not structural forces have influenced employment
On employment generation, the Periodic Labour Force Survey provides quarterly data on urban employment indicators and annually for the entire country, including rural India. A surge in agriculture employment is partly explained by reverse migration and the entry of women into the labour force in rural India. The Annual Survey of Industries has data on workers in nearly 2.0 lakh Indian factories. The total number of factory jobs grew annually by 3.6% between 2013-14 and 2021-22. Somewhat more satisfyingly, they grew faster at 4.0% in factories employing more than a hundred workers than in smaller factories (those with less than a hundred workers). The annual growth rate was 1.2% in the latter set of factories. In absolute numbers, employment in Indian factories has grown from 1.04 crore to 1.36 crore in this period. India does not yet have a corresponding Annual Survey of Services. The lack of availability of timely data on the absolute number of (formal and informal) jobs created even at annual intervals, let alone at higher frequencies, in various sectors – agriculture, industry including manufacturing and services – precludes an objective analysis of the labour market situation in the country.
The Annual Survey of Unincorporated Enterprises for 2022-23, when compared with the results of the NSS 73rd round of the ‘Key Indicators of Unincorporated Non-Agricultural Enterprises (Excluding Construction) in India’ shows that overall employment in these enterprises fell from 11.1 crore in 2015-16 to 10.96 crores. There was a reduction of 54 lakh workers in manufacturing but the expansion of the workforce in trade and services gained in jobs limited the overall reduction in the number of workers in unincorporated enterprises to around 16.45 lakhs between these two periods. This comparison masks a big jump in manufacturing jobs that seems to have occurred between 2021-22 (April 2021 to March 2022) and 2022-23 (October 2022 to September 2023).
India suffered two big economic shocks in quick succession. Bad debts in the banking system and high corporate indebtedness were one. It took the first term of the present government and more to bring it under control. The Covid pandemic was the second shock and quickly followed the first one. So, it is difficult to conclude that the Indian economy’s ability to create employment is structurally impaired. Nonetheless, going forward, the task is cut out.
Between the last Economic survey published in January 2023 and this one, big changes are afoot in the geopolitical environment. The global backdrop for India’s march towards Viksit Bharat in 2047 could not be more different from what it was during the rise of China between 1980 and 2015. Then, globalisation was at the cusp of its long expansion. Geopolitics was largely calm with the end of the Cold War, and Western powers welcomed and even encouraged the rise of China and its integration into the world economy. Concerns over climate change and global warming were not so pervasive or grave then as they are now. Fourth, the advent of Artificial Intelligence casts a huge pall of uncertainty as to its impact on workers across all skill levels – low, semi and high. These will create barriers and hurdles to sustained high growth rates for India in the coming years and decades. Overcoming these requires a grand alliance of union and state governments and the private sector.
Employment generation is the real bottom line for the private sector
It is worth reiterating that job creation happens mainly in the private sector. Second, many (not all) of the issues that influence economic growth, job creation and productivity and the actions to be taken therein are in the domain of state governments. So, in other words, India needs a tripartite compact, more than ever before, to deliver on the higher and rising aspirations of Indians and complete the journey to Viksit Bharat by 2047.
In more than one respect, the action lies with the private sector. In terms of financial performance, the corporate sector has never had it so good. Results of a sample of over 33,000 companies show that, in the three years between FY20 and FY23, the profit before taxes of the Indian corporate sector nearly quadrupled. Further, newspaper headlines told us that the corporate profits-to-GDP ratio rose to a 15-year high in FY24. BusinessLine reported, “The corporate profit for the Nifty-500 universe was up 30 per cent last fiscal to ₹14.11-lakh crore against ₹10.88 lakh crore in FY23. The nominal GDP grew 9.6 per cent y-o-y to ₹295-lakh crore (₹269-lakh crore)1”. Hiring and compensation growth hardly kept up with it. But, it is in the interest of the companies to step up hiring and worker compensation.
The Union government cut taxes in September 2019 to facilitate capital formation. Has the corporate sector responded? Between FY19 and FY23, the cumulative growth in private sector non-financial Gross Fixed Capital Formation (GFCF) is 52% in current prices. During the same period, the cumulative growth in general government (which includes states) is 64%. The gap does not appear to be too wide.
However, when we break it down, a different picture emerges. Private sector GFCF in machinery and equipment and intellectual property products has grown cumulatively by only 35% in the four years to FY23. Meanwhile, its GFCF in ‘Dwellings, other buildings and structures’ has increased by 105%. This is not a healthy mix. Second, the slow pace of investment in M&E and IP Products will delay India’s quest to raise the manufacturing share of GDP, delay the improvement in India’s manufacturing competitiveness, and create only a smaller number of higher-quality formal jobs than otherwise.
Nonetheless, there is a silver lining in the data. In the two years since FY21, GFCF by the private sector has grown faster. General government GFCF rose a cumulative 42% between FY21 and FY23. Non-Financial Private Sector’s overall GFCF increased by 51%; investment in Machinery and Equipment and Intellectual Property Products increased by 38%. So, the growth in these two critical sub-components of Private Sector GFCF is similar to that of the overall GFCF by the General Government. This is a statistic that bears watching. They should continue to invest. To do so, they need demand visibility. That comes from employment and income growth.
In a recent article,2 the Economist cites independent research that predicted a slow demise of India’s services exports over the next decade. While the boom in telecommunications and the rise of the internet facilitated business process outsourcing, the next wave of technological evolution might bring the curtains down on it. In this milieu, the corporate sector has a responsibility, as much to itself as it is to society, to think harder about ways AI will augment labour rather than displace workers. Hiring in the IT sector has slowed significantly in the last two years. We do not have a full picture of overall corporate hiring in the country on a regular basis. In any case, deploying capital-intensive and energy-intensive AI is probably one of the last things a growing, lower-middle-income economy needs.
A Staff Discussion Note of the International Monetary Fund published in June 20243 notes that Generative Artificial Intelligence raised profound concerns about massive labour disruptions and inequality. The IMF SDN goes on to recommend well-designed excess corporate profit taxes and high personal income taxes on capital through better enforcement of automatic information exchange between countries and enhanced taxation of capital gains. However, employment is about dignity, self-worth, self-esteem, self-respect, and standing in the family and community, not just about the income it brings. That is why it is in the enlightened self-interest of the Indian corporate sector, swimming in excess profits, to take its responsibility to create jobs seriously. Of course, it must find people with the right attitude and skills.
That requires another tripartite compact – between the government, the private sector and academia. This compact is to reboot the mission to skill and equip Indians to catch up with and get ahead of technological evolution. To succeed in the mission, governments must unshackle the industry and academic institutions to play their respective roles in that mammoth task. For example, despite several amendments over the years, the Apprenticeship Act remains a work in progress, at best, in encouraging large-scale apprenticeships in the country. The New Education Policy 2020 proposes freeing India’s higher education from regulatory oversight to market oversight. A corporate sector that helps shape the design of higher education with inputs to curriculum, evaluation standards, and faculty will pave the way for a high-quality higher education that market competition brings, replacing regulatory oversight. If anything, another article4 in The Economist that hails the arrival of China as a superpower in science should be sufficient inspiration for the corporate sector and academia to get their act together on scientific research and development.
The real corporate social responsibility
The role of the corporate sector has never been greater than it is now. Two other areas of corporate responsibility deserve mention here. The pandemic saw the emergence of the Indian retail investor as the bulwark of market stability. The culture of investing for the long term has to be nurtured and sustained. Market practices that take their cues from the thinly disguised leveraged bets masquerading as financial innovations in the developed world have no place in a developing country with a low per-capita income. Second, just as corporate profits are booming, the net interest margin of Indian banks has risen to a multi-year high. It is a good thing. Profitable banks lend more. To sustain the good times, it is important not to forget the lessons of the last financial cycle downturn. The banking industry must aim to lengthen the gap between two NPA cycles. It should also resist the temptation to pursue short-term profits at the expense of the customer. Product misselling is too rampant to be dismissed as an aberration of a few overenthusiastic sales personnel. The same can be said of the insurance industry as well. Prompt and reasonable settlement of insurance claims and a lower rejection rate are necessary to increase insurance penetration. Acknowledgement of misselling and misrepresentation and compensating for consequential losses is a good business practice enjoined upon stockbroking, fund management, banking and insurance firms.
Corporates benefit from the higher demand generated by employment and income growth. The financial sector benefits from channelling household savings for investment purposes.
These linkages must grow stronger and last longer to meet the infrastructure and energy transition investments in the coming decades. Short-termism can weaken these linkages.
For India’s working-age population to be gainfully employed, they need skills and good health. Social media, screen time, sedentary habits, and unhealthy food are a lethal mix that can undermine public health and productivity and diminish India’s economic potential. The private sector’s contribution to this toxic mix of habits is substantial, and that is myopic. The emerging food consumption habits of Indians are not only unhealthy but also environmentally unsustainable. India’s traditional lifestyle, food and recipes have shown how to live healthily and in harmony with nature and the environment for centuries. It makes commercial sense for Indian businesses to learn about and embrace them, for they have a global market waiting to be led rather than tapped.
Governments, on their part…
Policymakers – elected or appointed – have to rise to the challenge as well. There has to be conversation, cooperation, collaboration, and coordination across ministries, states, and between the union and states. Few people outside the government – living or dead – can understand the complexity of governing and transforming a nation of India’s (population) size, (geographical) spread and social and cultural diversity within a democratic framework. The political class, with its ears to the ground and the civil service, with its exposure to districts, states and central Ministries, have a better shot at (at least) a partial understanding of this complexity. They intuitively know there is no place for exclusive approaches and binary choices, which are the staple of sterile discussions and discourses. Examples are urban vs. rural, growth vs. equity or development, and manufacturing vs. services. They intuitively know that India needs multiple development pathways. That is a good thing. But it is easier said than done. It has not been done before. Not on this scale. Not in the time frame and not amidst a turbulent global environment. Forging and sustaining consensus between governments, businesses and the social sectors are necessary to succeed in this endeavour.
Agriculture can be a growth engine if…
The agriculture sector is one area ripe for and in need of such a pan-India dialogue. Agriculture and farmers matter for a nation. Most countries understand that. India is no exception. India subsidises their water, electricity and fertilisers. The former two are provided virtually free. Their incomes are not taxed. The government offers them a minimum support price (MSP) for 23 selected commodities. Monthly cash support is offered to farmers through the PM-KISAN scheme. Indian governments – national and sub-national –write off their loans. So, governments in India spend enough resources to look after the farmers well. Yet, a case can be made that they can be served better with some re-orientation of existing and new policies.
A panoply of policies – by national and sub-national governments – working at cross-purposes with each other is hurting farmers’ interests, destroying soil fertility, depleting groundwater, polluting rivers and the environment with nitrous oxide emissions, starving the crops of nutrients and undermining people’s health with a diet rich in sugar and carbohydrates rather than fibre and protein. The payoff will be immense if we untie the knots that bedevil farm sector policies. More than anything else, it will restore faith in the self-confidence and ability of the state to steer the nation to a better future, apart from delivering socio-economic benefits.
Earlier development models featured economies migrating from farm beginnings to industrialisation to value-added services in their development journey. Technological advancements and geopolitics are challenging this conventional wisdom. Trade protectionism, resource-hoarding, excess capacity and dumping, onshoring production and the advent of AI are narrowing the scope for countries to squeeze out growth from manufacturing and services. That is forcing us to turn conventional wisdom on its head. Can the farm sector be the saviour? A return to roots, as it were, in terms of farming practices and policymaking, can generate higher value addition from agriculture, boost farmers’ income, create opportunities for food processing and exports and make the farm sector both fashionable and productive for India’s urban youth. When resolved, the problem areas mentioned above that the current policy configuration has created over the years can become sources of India’s strength and a model for the rest of the world – developing and developed.
Unleashing small enterprises
Another area where policy intentions have yet to manifest in desired outcomes is with respect to small, medium, and large enterprises. Earlier, several products were reserved for small-scale industries. That was phased out as it benefitted neither the small-scale industries nor the overall economy. Recent concerted efforts at formalising them are making progress. Progress is relatively slower on access to finance. Buyers and creditors are shedding old mindsets and practices too slowly for these enterprises to feel the effect. However, these enterprises need maximum relief from the compliance burdens they face. Laws, rules and regulations stretch their finances, abilities and bandwidth, perhaps robbing them of the will to grow.
Successful Energy transition is an orchestra
Other priorities, such as energy transition and mobility, may pale compared to the complexity of getting the farm sector policies right. Still, they have one thing in common with it. They require getting many things across several ministries and states aligned. The list is long.
Energy transition and mobility issues require attention in the following areas:
(a) resource dependence on hostile nations;
(b) technological challenges such as intermittency of power generation, ensuring grid stability amidst surges and drop in generation from renewable energy sources and battery storage
(c) recognition of the opportunity cost of tying up land in a land-scarce country;
(d) fiscal implications that involve both additional expenditures for subsidising renewable energy generation and for e-mobility solutions, loss of tax and freight revenue currently accruing from the sale and transportation of fossil fuels;
(e) impairment to bank balance sheets from the so-called ‘stranded assets’ and
(f) examination of the merits of alternative mobility solutions such as public transportation models and more.
Emulating policy practices of other nations may be neither feasible nor desirable, for solutions may not emerge from approaches and places that created the problems in the first place.
Letting go is part of good governance
While contemplating the challenges that lie ahead, one should not be daunted because the social and economic transformation of democratic India is a remarkable success story. We have come a long way. The economy has grown from around USD288 billion in FY93 to USD3.6 trillion in FY23. India has generated more growth per dollar of debt than other comparable nations. Abject poverty has all but been eliminated. Human development indicators have improved, and more Indians, especially women, are getting educated. For all its flaws and warts, the system has delivered accountability through the democratic process and public discourse, where the occasional and rarer mature commentary proves effective. We should not lose sight of that.
However, it would be a missed opportunity – as there have been many in the past – not to strengthen a system to steer the country through a future that has become immeasurably uncertain. After nearly eight decades of relative peace at the global level, the world is moving towards a larger and wider conflict with longer-term effects. The Indian state can free up its capacity and enhance its capability to focus on areas where it has to by letting go of its grip in areas where it does not have to. The Licensing, Inspection and Compliance requirements that all levels of the government continue to impose on businesses is an onerous burden. Relative to history, the burden has lightened. Relative to where it ought to be, it is still a lot heavier. The burden is felt more acutely by those least equipped to bear it – small and medium enterprises. It holds them back, leashes their aspirations, and, in the process, holds the country back. On the face of it, it does not seem to matter because the economic growth rates are good, and there are visible signs of progress. But, we will never know the counterfactual: “what it might have been”.
Ishopanishad enjoins all of us to let go of (renounce) our possessions, be free and enjoy that freedom:
Power is a prized possession of governments. They can let go of at least some of it and enjoy the lightness it creates in both the governed and the governing.
Finally,…
The tripartite compact that this country needs to become a developed nation amidst emerging unprecedented global challenges is for governments to trust and let go, for the private sector to reciprocate the trust with long-term thinking and fair conduct and for the public to take responsibility for their finances and their physical and mental health.
The Economic Survey 2023-24 covers many of the issues discussed above in its several chapters, apart from informing readers of government policies and their performance, their impacts, innovations, developments and success stories worth emulating. As before, the staple content of the Survey is chapters that provide an assessment of the various sectors such as agriculture, industry, infrastructure and services.
For us in the Economics Division in the Department of Economic Affairs, putting the Economic Survey together and getting it into your hands or electronic devices is a labour of love. Recording and sharing the country’s progress in the year under review and reflecting on what it must do and must not to achieve the progress it deserves is a learning experience for us. In doing so, we may have made mistakes. Please do tell us. We promise to keep getting better at it. Ultimately, that is all we can and should ask of ourselves.
V.Anantha Nageswaran
Chief Economic Advisor
Ministry of Finance
Government of India
